Capitalism without Capitalization

The great journalist Michael Kinsley used to say -- I'm paraphrasing -- that the real scandal isn't the little items they catch them on -- the secretary in a tryst; the $500 toilet seat; whatever -- but the billions and billions of dollars they are shoveling about, possibly even legally.

As a corollary, someone at our shop was observing that at times, the real scandal isn't even something that's being done -- it's something that's not being done.

That might be a good way to understand one of the great, uncovered, almost unnoticed, scandals of the last 20 years.

It's not that some brokers over-tout a mutual fund or a stock that they have an investment banker or other relationship with -- though this happens at times, and it is wrong.

It's not that some companies took one position with their clients' money, and another with their own, though this should be proscribed too.

The real Wall Street scandal is one alluded to by 60 Minutes in their report last fall on Speed Trading, which the segment exposed in some detail. What I found most enlightening about the piece was its brief discussion of how speed trading and other methods to -- frankly -- profit without risk are diverting Wall Street from its real mission.

For my money, the biggest crime on Wall Street today might involve what is not happening... what is not being done. Not a conspiracy, but a "criminal" lack of hustle and initiative.

The following table shows the number of IPOs being offered on the U.S. market from 1991 to present, dropping to less than 20 per month lately from more than 100 per month in the mid-1990s.

To understand why this is so "scandalous," we have to ask ourselves:

What is the job of Wall Street?  Why does it even exist?

If there is any raison d'etre for the capital markets, it is to enable great ideas, great business strategies, great innovations, great new products, to get the financing they need to make their products and services available to the widest possible audience in the shortest period of time.

This is a noble mission, one which helps revolutionize the world.  It helps small firms grow, and create jobs.  It empowers consumers to find better products and services --  improves their lives by making medicines and foods and energy-saving devices and online movies and books all sorts of things available that they wouldn't otherwise have.

From this lack of initiative, everyone suffers.  

Dozens, hundreds of young companies can't come to market, because the brokers and investment bankers are too busy meeting with trading software engineers and lawyers to create ever-more-esoteric ways of squeezing a profit of those who don't enjoy their access to timely information -- even, sometimes, their own clients.   

Unemployed people don't get hired by those firms because they're under-capitalized, and consumers don't get their products.

Human beings see sloth rewarded, and watch as thrift and inventiveness goes un-capitalized and unrewarded -- and there is appropriately less invention and less thrift in the future.

What we see, to adapt a phrase from the late Jack Kemp, is "capitalism without capitalization."

That's the real Wall Street scandal -- and the tragedy.

Investing in securities and the financial markets involves risks, such as currency fluctuation, political risk, economic changes and market risks. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. Investing in financial markets and their publicly issued securities may not be suitable for all investors.

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